General Terms Flashcards
Indemnity vs Valued Contract
Indemnity contract: reimbursement of actual losses
Valued contract: bases benefits on a stated amount without regard for the value of the loss.
Medical expense insurance policies are indemnity contracts—the benefit cannot be greater than the actual loss. Life insurance policies are valued contracts that guarantee payment of a stated sum regardless of the perceived “worth” of the insured.
Errors and omissions (E&O) insurance
Liability insurance that protects producers from liability that may arise due to professional services they rendered in error or failed to render.
E&O coverage does not protect against willful misconduct. It will protect the producer who is sued because a mistake was made; it will not protect the producer who willfully engages in an unfair trade practice.
Reinsurance
The insurer looking to spread some of the risk is the ceding company. The insurer accepting the risk is the reinsurer. The ceding company pays a premium to the reinsurer for its coverage. When a reinsured loss occurs, the reinsurer pays its share of the claim to the ceding company.
The process through which insurance companies spread large risks among other insurers.
Law of Large Numbers
A mathematical principle that is the basis for predicting the odds of a loss occurring in a certain population in any given year.
*The law of large numbers does not predict who will suffer a loss, only the odds of a loss. While it’s impossible to predict with certainty if any one individual will die this year, it is possible to predict how many will die this year out of a group of 100,000 people born in a certain year.
Domestic, Foreign, and Alien Insurers
Insurers can be categorized by their state of domicile. There are three categories, known as _____, _____, and _____.
*Example: Excel Insurance Co. is chartered in Delaware, where Excel is considered a domestic company. In Illinois or any other state where Excel is admitted to sell insurance, it is a foreign company. In Canada or any other country, it is an alien company.
Contract of adhesion
A type of contract in which one party drafts the terms that must be accepted as-is by the other party.
*Insurance policies are contracts of adhesion. Because applicants for insurance have no input in the drafting of the insurance contract’s language, ambiguities in the contract are legally interpreted to the benefit of the policyowner.
Peril and Hazard
Two related general insurance terms:
- Peril is the immediate cause of a loss (and the event that is insured against).
- Hazard is any condition that increases the risk of incurring a loss.
As the immediate cause of a loss, a peril is the event that insurance protects against. A hazard increases the chance of encountering a peril.
Peril: death, disability, accidental Injury, illness
Hazard: smoking, excessive drinking, speeding
Mutual Insurance Company
A form of insurance company that is owned by policyowners. May distribute policy dividends (non-taxable) through participating policies.
*While structured in many ways like a corporation, a mutual insurance company does not issue stock and is owned by policyowners, whose evidence of ownership is the policy.
Concealment
The willful nondisclosure of material facts on an application for the purpose of obtaining insurance.
*Concealment is the deliberate withholding of material facts when applying for insurance, and is a form of fraud. Concealed facts give the insurer grounds to void the insurance contract provided it is discovered within the policy’s contestability period.
Stock Insurance Company
A form of insurance company that is owned by stockholders who may or may not also be policyowners. May distribute stock dividends (taxable).
*Like all forms of corporations, stock insurance companies may be privately held or publicly traded.
Buyer’s Guide and Policy Summary
Two related disclosure documents that are required by most states to be presented to life and health insurance applicants at some point during the buying process.
The Buyer’s Guide, given at the beginning of the buying process, explains the general features and conditions of the type of insurance being considered. The policy summary, given with the signed application, provides detailed information about the policy being purchased.
Risk Management
The natural process by which people contend with the perils faced daily, of which there are five common techniques.
1. Avoidance
2. Reduction
3. Retention
4. Sharing
5. Transfer
Selecting a higher deductible amount is essentially a risk retention technique.
Medicare
A federal insurance program that provides medical care benefits to covered workers (retirees).
Medicare has evolved over the years and now includes four parts:
A Hospital care
B Physician and lab care
C A managed care alternative to Parts A and B
D Drugs
Morbidity table
A table, compiled by health insurance company actuaries, showing the likelihood of becoming disabled or seriously ill because of sickness or accident at any age up to 100.
Morbidity rates also indicate how long a disability is expected to last.
NAIC
National Association of Insurance Commissioners (NAIC) represents the insurance department of every state, the District of Columbia, and several U.S. territories. It meets to promote uniformity through development of model insurance regulations.
While states are not required to adopt NAIC model regulations, most do adopt them in some form.